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Residential building activity expected to grow in 2021 – FNB

24th May 2021

By: Tasneem Bulbulia

Senior Contributing Editor Online

     

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Statistics South Africa’s (StatsSA) residential building numbers for the first quarter showed some positive growth in units completed, but growth in plans passed was still negative, notes financial services provider FNB.

A big growth rate in building activity is still anticipated this year owing to a very low 2020 base, but that may not necessarily mean a very strong 2021 level of building, FNB commercial property finance property sector strategist John Loos says.

He notes that the overall building activity numbers suggest that the residential development sector may not be set to produce major “fireworks” this year.

The number of residential units’ plans passed declined by 16.57% year-on-year. This comes after the negative year-on-year growth rate had recovered from a 73% year-on-year drop during the hard lockdown of the second quarter of 2020 to near 0% by the final quarter of the year.

Residential units completed did go into mild positive year-on-year growth territory to the tune of 9.02% in the first quarter, but a renewed decline in plans passed in the period suggests that strong levels of completions in the near term should not be expected, Loos notes.

However, he says the square metreage of plans passed was in mildly positive territory owing to an increase in the average unit size of these plans.

He also highlighted that the more cyclical part of the market is seeing its building levels respond to an increase in home demand owing to interest rate cuts last year.

This refers to total number of units excluding free standing homes smaller than 80 m2.

This small free-standing home category represents largely the most affordable end of the market and is not as strongly influenced by economic and interest rate cycles, notes Loos.

Excluding this abovementioned category from the totals, first-quarter numbers point to an 18.1% year-on-year growth rate in the number of units’ plans passed and a more significant 37.2% increase in the number of units completed, in the period, he indicates.

This includes an increase in units’ plans passed in the area of flats and townhouses to the tune of 14.4%, and a 25.5% increase in the number of ‘dwelling houses’ larger than 80 m2

The first-quarter data effectively points to the long trend towards greater living density in the country’s urban areas continuing, with the flats and townhouses category’s plans passed accounting for 58.2% share of total plans passed, up further from a 42.8% share in 2020, says Loos.

While the larger ‘dwelling houses larger than 80m2’ category has also increased its share of plans passed slightly this year to date, FNB sees this increase as a short term one at best, unlikely to become a trend in such a financially pressured economy, given their relatively high average value.

Therefore, densification is more likely to continue, with an increasing share of the smaller flats and townhouses category, says Loos.

The shift away from the smallest and most affordable of StatsSA’s three building categories has translated into an increase in the average size of units' plans passed recently, he notes.

FNB does not expect this rise to be sustained for much longer, though, because it is, in part, driven by growth in plans in the larger free-standing homes category, which it believes will be short lived owing to affordability limitations.

While the average value of units completed was still on the decline during the first quarter of this year, the average value of units’ plans passed had risen by a strong 36.2% year-on-year, also reflective of the shift in building in part away from the most affordable building category, says Loos.

OUTLOOK

There is likely to be a massive year-on-year growth surge in building plans passed and completed in the coming months, owing to the extremely low base created by 2020 hard lockdowns that took place in the second quarter of last year, Loos indicates.

“During that time, there was very little activity recorded at all, so year-on-year growth in plans passed and completions during the coming months could reach percentages in the hundreds and possibly even thousands.

“But these would be meaningless, really, merely reflecting last year’s extremely low base effect,” he says.

After last year’s total decline of 46.7% in the number of residential units completed, FNB projects a very strong positive growth rate of 80% for the full 2021.

However, that would not translate into a strong level of completions by historic standards, being insufficient to bring the number of completions back to pre-Covid-19 2019 levels.

This expectation of only “partial recovery” back to pre-Covid-19 levels is based on still-significant underlying weaknesses in the economy and the residential market, Loos says.

He mentions that the housing market’s underlying fundamentals are perhaps not as strong as it would appear.

“Admittedly, recent home buying demand has been strong, and the Home Owner Market appears to have been moving back into demand-supply balance, with some possible shortages of stock in places,” Loos notes.

However, this strengthening in the market appears largely to have been led by last year’s 300 basis points’ worth of interest rate cuts by the South African Reserve Bank (SARB) driving the cost of mortgage borrowing down sharply, he notes.

All the while, the household sector’s financial situation actually remains fragile at best, Loos states.

This is a severely pressured environment for the household sector as a whole, with the only thing partly masking the pressure in the housing market being low interest rates, he says.

Loos says departures from the rental to the buying market leave a “hole” in the rental market, but financial pressure among tenants has likely also led to a lack of new household formation (young labour force entrants delaying their departure from their parents’ home) and an increase in household shutdowns (tenants ending leases and returning to live with their parents or offspring).

The overall result has been a sharp rise in the average estimated residential vacancy rate, to 12.91% by the end of 2020, from a far lower 7.47% at the start of 2020 just prior to lockdowns and recession.

“Viewing the rental market, therefore, the residential supply situation appears far stronger than in the home buying market. That’s not conducive to strong levels of new development activity.

“In addition, an expected lack of further interest rate cutting by the SARB is likely to lead to some tapering off of home buying demand in the near term,” Loos says.

Therefore, while the development sector will be looking for development opportunities, especially to repurpose much vacant office space into residential apartments in and around certain major business nodes such as those in Northern Johannesburg, the scope for such development may prove to be limited in a financially constrained environment, with residential rental vacancies already very significant, Loos indicates.

A very strong building completions growth rate this year is, therefore, expected to reflect 2020’s low base effect, rather than a move back to strong actual levels of activity, he notes.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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